Risk Assessment and unusual transactions

Guest Author - Consuelo Herrera, CAMS, CFE

Auditors are confronted with situations where their responsibility is misunderstood. When dealing with significant unusual transactions, auditors should follow a proactive approach that leads them to cover the following categories stated by the Public Company Accounting Oversight Board, PCAOB through its Staff Audit Practice Alert No. 5:

Identifying and assessing risks of material misstatement,

Responding to risks of material misstatement,

Consulting others,

Evaluating financial statement presentation and disclosure,

Communicating with audit committees, and

Reviewing interim financial information.

Identifying risks is crucial for minimizing exposure to wrongdoing. Forensic accountants play an important role because their mindset searches instances of vulnerabilities far beyond a company records. They are trained to perform specific procedures and tests that take into consideration not just regular audit procedures but the organization and its people as a whole.

The process of risk assessment includes the following steps:

Identify Fraud risk factores

Brainstorming

Formulating inquiries

Performing analytical procedures

Performing other procedures as needed, and, based on the risk assessment,

Respond in a timely manner with actions that the organization against wrongdoing.

Knowledge of a client and the industry in which it operates enhances the possibility a detecting areas of exposure that lead to the implementation of preventing procedures and mitigation of fraud. Unusual transactions are also analyzed when investigating money laundering. Transactions are analyzed taking into account the individual risk classification and the information contained in the KYC, Know Your Client profile. Conclusions can thus be reached as to whether the amount of a transaction or deposit is, in fact, unusual. This ability helps auditors and investigators in identifying suspicious transaction patterns, such as pass-through transactions.Organizations should have procedures that provide specific guidance on actions to be taken by managers and officers identifying unusual transactions which need to be queried or further investigated as to their legality.When identifying unusual transactions and assessing risks observation and inspection techniques work very well. Here are some of them:

Inspection of documents and manuals, for example, accounting or internal control

Reading internal reports and minutes

Visit premises and plant facilities

Tracing transactions through systems.

If you identify a questionable transaction, investigate to determine if the transaction is proper, examine the documentation supporting the transaction to evaluate its validity, accuracy, reasonableness, and appropriateness. As appropriate, confer with those involved in initiating and approving the transaction to gain an understanding of the transaction. Depending on the results of the investigation, act accordingly.